Re-thinking e-commerce

Online trade for consumer goods and digital content (e-commerce) has grown steadily in the EU over the past few years. Nevertheless, the current EU rules pre-date the growth of on-line trading. Christina Pennock takes a look at the implications of this in light of the framework of the Digital Single Market.

A recent Preliminary Report published by the European Commission, follows a 16 month study of nearly 1800 companies. The inquiry forms part of the Commission-wide Digital Market Strategy, which outlines several actions through which the Commission envisages creating a ‘Digital Single Market’. The geoblocking elements of this strategy were previously reported on by Bird & Bird here. One of the Commission’s basic aims of the Digital Single Market is to ensure fairer access for businesses and consumers to goods and services via e-commerce across the EU. Whereas most of the objectives focus on improving regulatory barriers to cross-border online trade, this Report highlights evidence of barriers tocompetition created by companies and the prevalence of potentially infringing e-commerce business practices.

To ensure the EU remains at the forefront of the digital economy, along with a refresh to the surrounding legislation, the Commission has long recognised that there also needs to be a reduction in e-commerce barriers within the EU.

Consumer goods

For consumer goods, the Report shows that although online trading has enabled greater transparency and availability of competitor’s product prices, this may be a double edged sword. On the one hand it allows more intense price competition between retailers who can track competitors and it enhances a consumer’s choice and ability to find the best deal, but on the other hand price comparison can reduce deviation from recommended prices and facilitate collusion between retailers. The Report found cases of manufacturers tightly controlling prices and the quality of distribution by using a selective distribution system, rather than a more open one, or by contractually imposing vertical restraints upon distributors. The Commission warns that certain pricing arrangements between manufacturers and their retailers may merit further investigation, particularly where these effectively lead to resale price maintenance.

In addition the Commission found that manufacturers have tried to mitigate the impact of customers “free-riding” (seeking pre-sales services offline, but purchasing from an online operator) by including additional sales restrictions in their distribution agreements for the online marketplace. For example, many manufacturers grant exclusive distribution rights or create selective distribution networks which exclude or restrict pure online players (such as Amazon Marketplace or eBay) for at least part of their products. Although the Commission has suggested that it does not consider a ban on reselling on marketplaces to represent a hard-core competition law restriction, manufacturers need to be able to justify these restrictions on a case-by-case basis in relation to their particular products and distribution system.

Contractual restrictions in distribution agreements also include cross-border sales, pricing limitations and limitations on the use of price comparison websites. Although the Commission acknowledges that restrictions on online sales can be justified in certain circumstances, such as where high-quality distribution, brand image and pre- and post- sales services are necessary, it casts doubt on the need to prevent pure online sales for certain products. The Commission is concerned that some restrictions go beyond what is necessary to achieve the goals of selective distribution, which can make cross-border shopping more difficult and affect consumer choice.

Digital content

For the online distribution of digital content, providers are often required to geo-block by rights holders to restrict access to their online digital content services for users from other Member States. Other contractual restrictions include exclusive licensing whereby exclusivity may be granted in different forms, such as in relation to territory, transmission technology, and timing of releases.

What is next?

The Report is intended to “trigger a facts-based exchange of views with stakeholders” and interested parties can provide their input to the Commission during the public consultation period extending up to November 18, 2016. Should you wish to discuss the report in more detail or comment on it, please get in touch with the Bird & Bird Commercial team.

It is evident that this will not be the Commission’s final word in the area of e-commerce. The specific business practices identified in the Report as limiting online competition should provoke companies to reassess the legality of their distribution strategies and carefully consider whether any vertical restraints affect online selling and distribution through digital platforms. Although the objective of such a restriction may be to encourage retailers to invest in high quality services, to prevent free-riding, or to protect the product image, the restriction must be necessary to achieve those objectives and not go further than what can be achieved by other less restrictive alternatives. It is worth noting that the Commission has warned of further investigations of the highlighted practices and potential enforcement action. Companies should take this warning to review their contractual arrangements to ensure compliance with EU competition law.

The Commission expects to publish a final report in the first quarter of 2017 once it has canvassed interested stakeholders – watch this space for an update.

Christina is an associate in the Commercial Group, based in London.
She advises on a range of commercial contracts focusing on the retail, media and technology sectors. Working with UK and international clients, Christina has provided support on a wide range of commercial areas, including drafting and reviewing of software licences, distribution, publisher, consultancy and agency agreements. She also advises on e-commerce, advertising and consumer law, as well as franchising structures.